Losses: Perfect and Imperfect Competition

What this diagram shows

Demand, MR and MC are the same as in the supernormal and normal profit diagrams, but fixed costs are higher still, so AC sits higher at every output. Because fixed costs do not affect MC, both firms still produce q₁ where MC = MR on the rising part of MC and read the same price from their demand (AR) curve. Now AR is below AC at q₁, so total revenue does not cover total cost and the firm makes a loss, shown by the shaded rectangle (AC − AR) × q₁. Producing where MC = MR keeps that loss as small as possible.

Key points

• Both firms produce where MC = MR, at q₁ on the rising part of MC. Here that rule minimises the loss rather than maximising a profit.
• The price is read from the AR curve above q₁: horizontal for the price taker, downward sloping for the imperfectly competitive firm.
• A loss occurs when AR is below AC at q₁, so total revenue is less than total cost.
• Loss = (AC − AR) × q₁: the loss per unit, AC − AR, multiplied by output.
• Higher fixed costs raise AC but leave MC, q₁ and the price unchanged: the same firm moves from supernormal profit to normal profit to a loss.